The California Legislative Analysts Office ("LAO") released a report on April 30, 2012 entitled "School District Fiscal Oversight and Intervention," in which it examined the State's fiscal oversight system for school districts. In its most recent report, the LAO compiled fifteen predictive factors of school districts that face fiscal distress, summarized the current system for fiscal oversight and intervention, and assessed how this system is functioning.

Fifteen Key Predictors of School District Fiscal Distress

Governance crisis

Lack of communication with educational community

Lack of interagency cooperation

Failure to recognize ongoing budget problems

Disconnect between personnel data and payroll

Limited access to timely personnel, payroll, and budget control data and reports

Lack of routine categorical program monitoring

Unsustainable collective bargaining agreements

Compensation increases in excess of state funding increases

Failure to maintain healthy reserves

Flawed multiyear projections

Flawed average daily attendance projections

Inaccurate revenue and expenditure estimates

Poor cash flow analysis and reconciliation

Categorical program increases in excess of categorical funding increases

Brief Overview of the Current System

The current fiscal oversight system was put into place by the State in 1991 in order to monitor the fiscal condition of school districts. Under this system, County Offices of Education ("COE") are responsible for reviewing a district's financial condition at various points of the year. Districts can be certified as (1) positive, (2) qualified, or (3) negative. Districts that receive a qualified or negative certification are subject to COE intervention including, but not limited to, oversight by a fiscal expert and review of any new collective bargaining agreements. If a district cannot meet its financial obligations, the State provides it with an emergency General Fund loan. The Superintendent of Public Instruction then assumes all duties and powers of the local school board and appoints a State administrator to act on his behalf. The administrator's primary goal is to restore the fiscal solvency of the district as quickly as possible.

LAO Findings and Recommendations

The LAO concluded in its report that the current system of fiscal oversight has generally been effective in ensuring the fiscal health of school districts. The report notes that "the system appears to have reduced the number of school districts requiring state assistance and has provided oversight and support while still allowing school districts to have final decision-making authority in most cases."

The LAO recommends preserving the current system in order to ensure sufficient support to prevent districts from requiring intervention. "The fiscal oversight system is especially crucial during challenging fiscal times, when school districts often must deal with uncertain revenues, large state deferrals, and possible trigger reductions." However, the LAO cautions against the recent actions that the state has taken that have had the effect of reducing the ability of the COEs to use existing tools to monitor, assess, and disapprove school districts' budgets or certify districts as qualified/negative.

The LAO concludes that, "Given the system has proven to be generally effective over the last two decades -- during both good and bad economic times -- we recommend the system be preserved. In recent years, however, certain state actions temporarily have reduced the system’s effectiveness. In particular, in the last three years, the state temporarily has reduced the ability of COEs to identify districts on the road toward fiscal distress and provide these districts with additional oversight and assistance. Moving forward, we caution the state against adopting these types of actions. As districts continue to struggle in the aftermath of the recent recession, we believe preserving the existing oversight system is vital for fostering the ongoing fiscal well-being of districts."

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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